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The proposed New York Department of Financial Regulation

As previously announced, New York Governor Andrew Cuomo proposed merging the State Departments of Banking, Insurance and Consumer Protection into a single Department of Financial Regulation (DFR).

However, the details of the proposal released earlier this month describe an entity that has broader regulatory authority both in content and scope. The breadth of the proposal is highlighted both in its stated intent and the powers conferred upon the Superintendent of the DFR. The stated intent is for the Superintendent to supervise the business of, and the persons providing, financial products and services, and the Superintendent’s powers fuel this intent by conferring upon him the power to “conduct investigations, research, studies and analyses of matters affecting the interests of consumers of financial products and services . . .” The term “financial products and services” is defined with considerable scope. It includes not only products and services offered by entities covered by the insurance and banking laws but also “any investment, credit debt, lien, deposit, derivative or money management device.”

The DFR’s power is further expanded in that it applies not only to financial products and services but also to acts and practices involving financial products and services. Acts or practices “involving” a financial product or service encompass the financial obligations of a consumer, the balance of a consumer’s account, a consumer’s credit, a purchase leased or financed by a consumer, gift certificates, rebates, a consumer’s financial and personally identifiable information, and sweepstakes. Although the proposal does not confer jurisdiction with respect to financial products or services regulated under the exclusive jurisdiction of a federal agency, it is evident that the DFR’s jurisdiction will reach a broader universe of financial product service providers than its predecessors (the Insurance and Banking Departments) on a combined basis.

In addition, it appears that a more aggressive regulatory body is contemplated. The DFR would include a newly created Financial Frauds & Consumer Protection Unit (FFCPU). Under the bill introduced by Governor Cuomo, the FFCPU will serve as a central repository for consumer financial complaints and will have the authority to investigate any alleged financial fraud or misconduct at any bank, insurance company or financial institution doing business in New York.

To investigate, the FFCPU will merely need a reasonable suspicion that financial fraud or misconduct has occurred, and there would no longer be a “materiality” requirement with respect to holding company examinations. As such, holding companies could be examined if the Superintendent deems there to be reason to believe that the activities of the entity affect the operations, management, or financial condition of any controlled insurer within the holding company group. The proposal also calls for the provision of immunity to persons that supply information to law enforcement or the FFCPU in connection with an investigation. Further, the proposed statute authorizes the Superintendent to collect restitution and damages and to levy penalties of up to $5,000 for each act of financial fraud “upon any person, including any regulated person… and any such regulated person’s employees.” The proposal contemplates individual, as well as a corporate, responsibility. This goes beyond the current powers of the Attorney General and the Martin Act to seek civil penalties. In addition, the proposal significantly increases the penalty that may be levied upon persons or entities licensed, certified, registered or authorized under the insurance law (except for producers and bail bondsmen) for willful violation of any insurance law or regulation from a maximum of $500 per violation of the law to $10,000 per violation.

Additional purposes of the legislation are the encouragement by the Superintendent of high standards of, among other things, transparency and public responsibility, and to educate and protect users of financial products and services, and the Superintendent is granted the power to take such action as he or she deems appropriate to so educate and protect such users. The Superintendent’s additional power and responsibilities are interesting to banks and insurers not only because they fall so squarely within this increased regulatory paradigm, but also because the DFR is funded through insurance company and banking institution assessments. Not surprisingly, this new agency has a proposed budget of $564 million, which is an increase over last year’s combined budgets of $557 million allocated to the agencies it will replace. The allocation of assessments between insurance companies and entities regulated under the banking law should prove challenging for the DFR.

As it relates to the power to impose assessments on New York State chartered banks and their holding companies and affiliates, the bill provides that the Superintendent may, beginning April 1, 2012, assess expenses in such proportion as he or she deems just and reasonable against banks and insurers. Costs of examination and investigation of holding companies shall generally be assessed against the holding company, and costs of examinations of non-bank subsidiaries and affiliates of banks will be assessed against the bank if the affiliate can’t be assessed directly under the banking law. Noteworthy is that banks cannot be assessed for expenses that are deemed by the Superintendent to benefit solely persons regulated under the insurance law, and vice versa. The bill also establishes a special account called the “consumer protection account,” which will consist of fees and penalties received by the department of state and DFR, as well as other monies received in the form of penalties. These monies will be available to the DFR to pay for costs related to its consumer and investor protection activities. If the consumer protection account is insufficient to cover those costs, the balance would be recoverable through assessments against the industry.

Under the bill, the Banking Board will be eliminated and all employees of the Banking Department will become employees of the DFR. In addition to the new powers to oversee consumer and investor protection, the new Superintendent of the DFR will take the place of the New York State Superintendent of Banks. Except as expressly amended by the bill, all of the Banking Law and the rules and regulations of the New York State Banking Department promulgated thereunder, and all prior determinations and decisions, will remain in effect, and any pending actions and proceedings will not be affected, with the DFR and/or Superintendent of the DFR being substituted for the Banking Department and Superintendent of Banks.

The bill makes New York’s “wild card” authority (that was set to expire 9/10/11) permanent. Under this authority, the Banking Board has the power to grant to New York chartered banking organizations, as well as licensed foreign bank branches and agencies, powers possessed by a counterpart federally-chartered banking institution.

If the bill results in (i) higher assessments for NY banks and their affiliates and/or (ii) loss of the "local touch" and hands-on attention that New York State banks have enjoyed from their regulators who were solely focused on bank examination and regulation and who will now have more constituents and responsibilities, some New York State banks may consider it beneficial to convert to a national bank or federal savings association charter.

In sum, the DFR will have much more significance than a consolidation of regulatory agencies to insurers, banking institutions and other providers of financial products and services.

Most provisions of the bill take effect on April 1, 2011; a notable exception is the provisions that address assessments to fund the DFR which will not become effective until April 12, 2012.